How to buy bonds—at a fair price

The North American economy is expected to grow this year, and central banks on both sides of the border will probably engage in some interest rate hikes. This may lead you to think more about buying bonds for your portfolio. But there is no exchange for bonds. So how do you get them?

How to buy bonds

Unlike stocks, there is no
exchange for bonds. So where
and how do you buy them?

Every month the Money Reporter profiles a list of recommended bonds. It offers a select list of corporate, convertible, Government of Canada, provincial and strip bonds that we believe are appropriate for you as an income investor.

Along with the specific bonds themselves we also include some information on their current prices and yields, and their call features. We sometimes supplement that with a specific recommendation for a bond that is a particularly good buy at that time.

That’s the good news. Certainly the retail investor has a very difficult time these days even finding out what bonds are available, let alone their current prices. More than a decade ago, The Globe & Mail Report on Business stopped running a list of bonds every Monday. Soon after, the Financial Post also dropped its coverage of bonds, both in the paper itself and on its website.

Bond price quotes are a rare commodity

The reality is that timely and accurate bond price quotes are a rare commodity as far as the public goes. There is no newspaper, website or other publicly-available source that we know of that provides a comprehensive list of Canadian bond prices and yields at no charge.

There are, however, a number of sites that provide select lists of bond quotes. If you search for ‘Canadian bond quotes’, you’ll find some of these. They include CanDeal, Globe Investor and Canadian Fixed Income.

We recognize that the scarcity of bond quotes makes our list prices and yields even more important to you, our subscribers.

The not-so-good news is that when our subscribers decide to act on one of our bond recommendations, they don’t always have the greatest luck doing so. From the feedback we’ve gotten, the two questions that you most often have are: 1) “My broker doesn’t have that bond. Where can I buy it?” and 2) “My broker has that bond, but says it’s a higher price than you indicate in your listings. How can I get the price/yield that you show?” Here’s our advice.

Bonds don’t trade the way stocks do

Regarding the first question, we need to dig right down to the fundamentals of how the bond market works. Bonds don’t trade like listed stocks, where there is a central exchange that every brokerage firm can go to and, on your behalf, buy whatever is available.

Instead, each brokerage firm that deals in bonds has its own select inventory, and even the biggest firms don’t hold every bond. For example, even a big bank-owned brokerage firm might have 200 or so bonds in its inventory, but that’s a far cry from the 3,000 or so bonds that are available in the overall market.

And when it comes to smaller dealers, they carry far fewer bonds in inventory, sometimes only a few. And, of course, some brokerage firms don’t have an inventory of bonds at all.

Discount brokers offer a limited selection

Further complicating the issue is that the discount broker divisions of the big firms sometimes only offer a limited selection of all the bonds that the big firm itself carries in inventory. The main firm may have it, but the discount subsidiary doesn’t have access to it.

So, with that many bonds available in the overall marketplace, and each firm carrying a limited supply of them, how are you, the investor, supposed to find the bond you want to buy? In the main, the more firms you have accounts at, the more likely one of them will carry the bond you’re interested in buying.

There are a few ways around this problem. First, in our listings, we tend to feature the most popular and liquid bonds available at some of the largest discount brokers.

This increases the odds that your firm also carries them. That much we can control.

Second, if you’re a discount brokerage client, try calling a full-service broker at the same firm to see if they have the bond in inventory. And if they do, open an account with that broker.

Third, you can do either of two things. One, you can ask your broker to call around ‘the street’ to find out who does have the bond, and have it brought in for you. This may depend on how good your relationship is with your broker. But even discount brokers may perform this service for you. Or two, call some of the other big firms yourself to find out who does have that bond, and open an account there.

Failing all that, you can buy what your firm has available, as long as it has a similar coupon, term, credit rating and issuer type. There won’t likely be a lot of return performance difference between, say, a 3.50 per cent XYZ Utilities bond due March 15, 2025 (rated AA) and a 3.25 per cent ABC Utilities bond due Dec. 1, 2024 (rated AA) as long as both underlying companies are fundamentally sound.

Two prices for bonds

Notwithstanding the above, many of our subscribers have no trouble getting access to the bonds they want. Their question is more about pricing, and how they can buy at the prices we’ve listed.

As we’ve already described, bonds trade on a principal basis, meaning there are no commissions for buying or selling bonds. Instead, the difference between the bid price and the offer price of the bond represents the profit to the dealer. In other words, there are always two prices for a particular bond: one for if you want to buy it, and another for if you want to sell it.

When we publish the prices for our list of recommended bonds, we always use the ‘offer’ price. In other words, the price we show already has the spread included. So if you’re buying this bond, this price or close to it is the price you should be paying. On the other hand, if you’re selling, you should expect less than this price, by maybe a dollar or so.

Let’s take a specific example. For the Royal Bank 1.65s of July 15, 2021, we show a price of 97.36. But the actual quote we got was 96.230—97.362.

To explain that bit by bit, the 96.230 is the bid price. What that means is that this brokerage firm is willing to buy your Royal Bank 1.65s of ’21 from you at 96.230 cents per dollar par. On the other hand, if you you want to buy the same bonds, this firm wants 97.362 cents on the dollar, or they won’t sell it to you. We then simply rounded 97.362 down to 97.36 in our table. We also use the 97.362 price in our yield calculation.

A little ‘vigorish’ can go too far

So, can you expect to buy this bond at this price? Maybe not, because at this price the firm will get its cut, but your individual broker will not, so he or she will mark it up a bit more. A bit is fine, but too much is too much. Another factor that affects the price is the dollar value of the bonds you’re purchasing. For example, you should be able to get a more advantageous price if you purchase $100,000 of bonds, rather than just $5,000.

At least with our prices as a guide, you’ll know if your advisor is charging a bit more, or too much.

Perhaps the better approach is to calculate what the yield to maturity will be at the price they’re asking. If, for example, your advisor wants to charge you 97.862 for the bond noted above, that translates into a yield of 2.50 per cent (versus 2.70% in our tables). Your advisor’s top-up is costing you a significant yield sacrifice in this example, so you could ask him or her to lower it.

This is an edited version of an article that was originally published for subscribers in the December 14, 2018, issue of Money Reporter. You can profit from the award-winning advice subscribers receive regularly in Money Reporter.

Money Reporter, MPL Communications Inc.
133 Richmond St. W., Toronto, On, M5H 3M8, 1-800-804-8846

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